Acc201 Financial Accounting- The Financial Assessment Answer

At the end of part 1 you need to choose an ASX enlisted company for financial analysis. To make the right choice you need to have a clear understanding of
Relevant information
Fair presentation
Accounting estimates
The following cases are independent and not related to each other. Research and give answer of the
following 3 cases. 

Case 1: Relevant information for an investment company A year ago you bought shares in an investment company. The investment company in turn buys,holds and sells shares of business enterprises. You want to use the financial statements of the investment company to assess its performance over the past year.
Required:
a) What financial information about the investment company’s holdings would be most relevant to you
b) The investment company earns profits from appreciation of its investment securities and from dividends received. How would the concepts of recognition in the conceptual framework apply here

Case 2: Fair presentation (Hint: Chapter 16)
The directors of an Australian company that is required to prepare financial reports under the Corporations Act conclude that applying the requirements of AASB 136/IAS 36 Impairment of Assets would not provide a fair presentation because the resulting $80 000 impairment loss is temporary.
Required: Advise the directors how this problem should be addressed in the financial statements in
accordance with AASB 101/IAS 1.

Case 3: Accounting estimates (Hint: Chapter 18)
The board of directors has resolved to change its accounting policy for capitalising gains or losses on its cash flow hedges recognised in other comprehensive income. Previously, such gains or losses were capitalised to hedged items but the directors now believe that taking such gains or losses to profit or loss is a more appropriate treatment. Due to a recent computer virus, all data from the noncurrent asset register, including specific depreciation details from prior periods, has been destroyed.

Required: The board of directors has approached you for advice regarding the disclosures, if any,that are required for this change in accounting policy. 

Answer:

a) Depicting the financial information about investment company holdings:

The overall performance of the investment company can be identified by detecting fair values of the investments which are held by the company. The following measures can be used by the company for understanding the financial performance of the investment company.

  • The relevant valuation of the fair value of securities held by the investment company needs to be conducted for identifying the relevant income that could be generated by the company.
  • Moreover, estimation of the changes in fair value also needs to be conducted by the company, which might help in generating higher revenue from investment. The turnover of the portfolio, interest earned, dividend earned and risk of the portfolio also needs to be estimated.
  • Lastly the estimation of tax and relevant income generation capacity of the organisation also needs to be conducted for estimating the relevant financial performance of the company.

b) Depicting the concept of recognition in conceptual framework:

From the evaluation of IASB Framework relevant definition of asset, liability, expense and income needs to be recognised by the company. The relevant concept of recognition mainly evaluates the probability of future economic benefits associated with the investment will flow adequately (Van, 2014). In addition, the item needs to be measured with reliability, as it directly helps in improving the performance of the investment scope. The overall appreciation in the investment can mainly help in detecting high revenue for the investment company. Furthermore, fair value changes and dividends mainly needs to be estimated by the investors for identifying the total revenue generated by the company.

Case 2: Fair presentation

From the overall evaluation relevant financial statements of the company needs to be conducted on the basis of AASB 101/IAS 1. However, the AASB 101/IAS 1 standard does not permit the management to depart from the accounting standards even if they are able to detect misleading and conflicting objective in financial statements. The relevant AASB 101/IAS 1 accounting standard only allows the managers to provide additional disclosure in the annual report, which might help in nullifying the misleading attribute present in the annual report. According to the AASB 101/IAS 1, the organisation needs to adjust the relevant disclosure in the annual report, if any kind of discrepancy was identified by the management (Kim, 2013). Moreover, the relevant disclosure that needs to be conducted under AASB 101/IAS 1 should include the following attributes.

  • The relevant disclosure regarding the standard needs to be conducted by the managers in their annual report. Moreover, the current situation mainly faces the AASB 136/IAS 36, which directly states the impairment of assets.
  • The situation mainly indicates a recognition of an impairment loss, which is been conducted by the company. This relevant extent of the carrying amount of the assets mainly exceeds the recoverable amount of the assets.
  • The overall belief of the management is that the impairment is relevantly temporary and cannot continue further.
  • Furthermore, the relevant adjustment is mainly required to complete, which might help in depicting the fair presentation and relevant carrying amount of the assets needs to increase by $80,000.

The required adjustment that is been conducted by the company will mainly increase the overall tax expense and raise the deferred tax liability by $24,000 with a tax rate of 30%.

Case 3: Accounting estimates

The relevant estimates need to be conducted, as per the paragraph 29 of AASB 108, which directly depicts the voluntary change and provisions conducted by the management (Carrol & Laing, 2016). The relevant provisions of AASB 108 are depicted as follows.

  • The overall nature of change needs to be conducted
  • The overall application of new policies could help in bringing more reliability and relevant information.
  • The relevant amount of adjustment relating to previous fiscal year present to the extent of practicability is also conducted.

The management has mainly resolved the accounting policy for treatment of capitalising gains or losses on its cash flow hedges recognised in other comprehensive income. The board mainly aims in treating the capital gain and loss in income statement instead of hedging, which was previously conducted by the organisation. Therefore, from the overall evaluation it could be understood that the overall change in accounting policies following the recent fire incident is mainly impractical. All the relevant data of the organisation was mainly destroyed. The management mainly states that the use of new accounting policy will mainly provide higher reliability and information. The relevant information is not provided by the company, which does not provide all the relevant information for the preparation of annual report.

Choosing the company

Name of the company

Wesfarmers

Web link to download the 2016 annual report

https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4

Current share price of the company

AUD 43.85

Bibliography

Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education.

Carrol, A., & Laing, G. (2016). Manipulation of earnings through correction of prior period errors (AASB108): An empirical test. e-Journal of Social & Behavioural Research in Business, 7(1), 16.

Kim, S. (2013). The classification of Information and Communication Technology Investment in Financial Accounting (Master's thesis, University of Sydney).

Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU.

Renz, D. O. (2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.

van Mourik, C. (2014). The equity theories and the IASB conceptual framework. Accounting in Europe, 11(2), 219-233.


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